The SECURE Act: Financial Planning Challenges and Opportunities

It’s not very often that Congress passes sweeping legislative changes that affect retirement planning in a meaningful way, but that’s exactly what happened when the SECURE Act was signed by President Trump last month. Most provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act went into effect January 1, 2020 and includes some notable new rules – many of which may apply to you or a member of your family.

While the list of changes the act encompasses is not exhaustive, below are the key items that are most likely to impact your personal financial plans.

More people are eligible to make IRA contributions

Previously, making contributions to a traditional IRA was not permitted after reaching age 70.5.  This legislation allows anyone with earned income (or a spouse with earned income if filing jointly) to make an IRA contribution.

The SECURE Act also allows certain taxable fellowship or stipend payments for graduate students to be treated as earned income in order to qualify for traditional or Roth IRA contributions. 

While there are other aspects of the SECURE Act, these changes are the ones most likely to impact your personal financial plan. Your Bartlett advisor is here to help you navigate how SECURE relates to your specific situation. We encourage you to contact us so together we can explore how this new legislation will impact you.

The end of the stretch IRA

For most of our clients, the most impactful rule to come out of this new legislation will be the demise of the stretch IRA. Previously, a beneficiary of an inherited IRA could take distributions from the account over their lifetime. Now, IRAs inherited January 1, 2020 or after must be emptied within ten years of inheritance.

This additional income could have broad unintended consequences for the recipient. While the act does not require minimum annual distributions, emptying the account within ten years could force heirs to make withdrawals that push them into higher marginal tax brackets in a given year. Compressed timeframes for annual distributions introduce several other implications, from higher Income-Related Monthly Adjustment Amounts for Medicare Part B premiums for older beneficiaries to FAFSA eligibility for younger ones.

There are a few exceptions to the 10-year rule – known as “Eligible Designated Beneficiaries.”
They include:

  • Spouses
  • Beneficiaries who are not more than 10 years younger than the account holder
  • The disabled and the chronically ill (as defined by the Internal Revenue Code)
  • Minor children (of the account owner; grandchildren would not qualify) – but only until they reach the age of majority and then the 10-year rule is in effect

We encourage clients who have created conduit or “see-through” trusts to take advantage of the stretch treatment to revisit their IRA beneficiary designations as soon as possible. 

The increase in age for required minimum distributions

Under the provisions of the SECURE Act, the age at which you are required to begin taking required minimum distributions (RMD) from your traditional or rollover IRA has been raised from 70.5 to 72. However, individuals who reached 70.5 before January 1, 2020, and have already begun taking distributions from their IRA will not get a reprieve.

The combination of the end of the stretch IRA and the additional 18 months before being required to take minimum IRA distributions may present a planning opportunity. For clients who have retired but not reached age 72, it may now make sense to convert some of their IRA dollars from traditional or rollover accounts to Roth IRAs at potentially lower marginal tax rates. Though inherited Roth IRAs are still subject to the 10-year rule, there are no income tax consequences to the beneficiary. 

Also of note: the age at which you may make a qualified charitable distribution, or QCD, remains unchanged at 70.5, so an individual who has reached 70.5 is eligible to make $100,000 in QCDs each year (and up to $200,000 annually for those filing taxes jointly). This will be a beneficial option for some, as it can lower the balance of your IRA for the calculation of future RMDs. The strategy will likely not make sense for those who have highly appreciated securities they could gift to charity instead, as you are withdrawing dollars before being required to do so, and it is not a tax-deductible charitable contribution.